Opinion
Editorial

Debts will sink many if interest rates rise

Canadians have enjoyed cheap credit for so long it will be an immense shock when interest rates begin to rise, although that's not likely to happen anytime soon.

On Wednesday, the Bank of Canada announced its key interest rate of 0.5 per cent would remain unchanged and would continue as it has since mid-2015. The key interest rate has remained at one per cent or less since 2009, an extraordinary seven-year stretch that has effectively punished savers and encouraged the accumulation of private and public debt.

Interest rates have been suppressed to encourage economic growth, but there has been collateral damage. Today, a great number of Canadians are mired in debt while finding it difficult to save.

Indeed, a survey released Wednesday, the same day as the Bank of Canada announcement, says 39 per cent of its respondents (more than 5,600 employed Canadians who were polled earlier this summer) find themselves overwhelmed by their debt. Most of them cite mortgages, followed by credit card debt, car loans and debt from a line of credit. An incredible 11 per cent believe they'll never be debt-free.

Of course, the survey, conducted on behalf of the Canadian Payroll Association, isn't entirely about debt. It's also about income, or rather a lack of income among respondents. Forty-eight per cent said they live paycheque to paycheque, and about 25 per cent said they wouldn't be able to find $2,000 to cover an emergency situation.

About half of those polled said they are able to save five per cent or less of their income. But with increased debt (22 per cent admit to finding it difficult to pay off their credit card balance) it remains a struggle.

Any incentive to save money within such an economic landscape is difficult to pinpoint, although there are Canadians who save and some who save prodigiously. One of the legacies of the Stephen Harper government is the Tax Free Savings Account, a financial device that encourages the saving of money with the promise that it won't be subjected to taxation once placed into a TFSA. But again, the bank rates on a TFSA are tiny; meaningful growth comes only with the careful investment of those same funds.

The situation is a far cry from the early 1980s when borrowing charges were approaching 20 per cent.

We'll never see a return to those rates, as they were the response to an era of historic inflation. But at some point, interest rates will be nudged upward, and the impact on those who now say they're overwhelmed by their debt will likely be catastrophic.